High Hurdles for a Rising India

December 01, 2003

By Bruce Einhorn While India's information-technology hub, Bangalore, has a futuristic buzz, far to the north is a reminder of unfinished business from India's past. India and Pakistan, both of which claim the disputed state of Kashmir, have thousands of troops facing one another across the border. In late November, the countries declared a ceasefire in their decades-long dispute, which should help to ease tensions between the two nuclear powers.

Still, it wasn't that long ago that they nearly came to full-fledged war over Kashmir. And it's not hard to envision a scenario where the cease-fire collapses and tensions flare again, raising the harrowing prospect of the threat of atomic mushroom clouds over Indian cities.

Not exactly a reassuring thought for a multinational company thinking about investing in India. But Loh Kin Wah, head of Asia Pacific for Infineon Technologies (IFX), says he has little reason to worry. The German semiconductor manufacturer employs 200 engineers at its Bangalore development center and plans to add 300 more within a few years. "India is a very big country," observes Loh. And Bangalore "is quite far from the border. It's simply overplayed to say that there is an issue with security."

MUNDANE CONCERNS. That's a common refrain among many Asia-based executives' thinking about India. While New Delhi may have its hands full dealing with the Kashmir problem and terrorist attacks, multinationals are still busy hiring in Bangalore, Hyderabad, and other high-tech centers. One incentive is the economics (see BW Cover Story, 12/8/03, "The Rise of India"). And the nuclear issue seems too distant to executives used to worrying about more commonplace risks, such as corruption.

"The nuclear thing is something that businesses can do nothing about," says Steve Vickers, president and CEO of Hong Kong-based International Risk Ltd. "Frankly, it's something that you have to accept as something that can happen to you."

So rather than fret about the bomb, execs are giving their attention to more mundane concerns. Electronics manufacturer Flextronics (FLEX) has a small operation in Bangalore that assembles set-top boxes for TVs. For Executive Vice-President Peter Pan, the biggest concerns about doing business in India are its poor infrastructure and restrictive tax policies. It makes little sense to assemble cell phones in India, says Pan, because the government imposes high duties on imported manufacturing equipment. "It's cheaper to import handsets than to make them," he says.

SHOW OF CONFIDENCE. No wonder, then, that many outsiders say India's policymakers, not Pakistan's nukes, are the biggest threat to the country's rise as a destination for foreign investment. "There's almost a desire among the bureaucrats to watch you squirm," says Jean Eric Salata, managing partner at Baring Private Equity Partners Asia in Hong Kong. "You have political infighting to the point that it's almost stifling."

India's shabby roads, ports, airports, and other infrastructure also keep many investors away. Taiwanese electronics company Yageo, which makes components for PCs, employs thousands of workers in China and could easily benefit from the low-cost workers in India. But Lambert Hilkes, Yageo's vice-president for business development, says it won't even think about investing in India because of the poor infrastructure. "We would be at least one generation too early if we were to go to India," he says.

The good news for the country is that many investors believe that it's on the right path and are willing to extend the benefit of the doubt. For instance, the Indian stock market fell after the terrorist attacks in Bombay last summer but then quickly recovered. "One or two such incidents are not going to affect how people perceive the country," says Dominic Barton, Asia director with McKinsey. "There's more confidence."

Of course, no one can guarantee that the confidence will last. Another terrorist attack is all it might take to lead to a showdown between India and Pakistan. For now, though, foreign executives are focusing on some of India's other problems. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online